U.S. dollar bulls relinquished control of the market today. With the exception of the euro and the Swiss Franc, the greenback traded lower against all of the major currencies. More than 4.4 million people filed for unemployment benefits last week, which was slightly better than expected but failed to help the greenback because over the past five weeks 26.45 million Americans lost their jobs, which effectively erases all of the new jobs created during the past 10 years. Of course, everyone hopes that these are not permanent job losses and that furloughed workers will return once the economy restarts, but the need for ongoing social distancing requirements means businesses may only be able to hire back part of their workers. It was no surprise to see the sharp decline in Markit PMI manufacturing and service sector numbers for the month of April. Friday’s durable goods reports are expected to show the same contraction.
USD/JPY spiked higher at the start of the New York session after the Nikkei reported that the Bank of Japan will discuss unlimited bond purchases at next week’s meeting. It is not clear how much more it can buy, but the mere possibility of further BoJ action sparked a decline in the currency. PMIs in Japan continued to fall further, which was no surprise. With Japan implementing emergency measures later than most countries, its recovery will be delayed as well.
The only two currencies that performed worse that the greenback today were euro and the Swiss Franc. Eurozone PMIs were significantly weaker than expected with the composite PMI index falling to a record low of 13.5 in the month of April against expectations for a decline to 25. The manufacturing sectors held up better than services and the data for Germany was slightly better than France. Italian and Spanish numbers should be particularly ugly. EUR/USD dropped below 1.08 on the back of these reports as investors look for further action from the European Central Bank next week. The Swiss Franc fell in sympathy with the euro, but traders also drove the currency lower after the Swiss revised down its GDP forecast to -6.7% growth this year from -1.5%. Many countries will be lowering their GDP forecasts, including the BoJ, the European Central Bank and the FOMC who meet next week.
The best performing currencies today were the commodity currencies. The New Zealand and Australian dollars led the gains, while the Canadian dollar trailed behind. New Zealand and Australia have been very effective in controlling COVID-19 and are ready to restart their economies. New Zealand will be moving to Level 3 lockdown from Level 4, where schools can open with limited capacity, businesses can open but not physically interact with customers and gatherings of up to 10 people will be allowed for weddings and funerals. They are also looking at a new stimulus plan that could involve universal cash handouts.
In Australia, AUD soared despite weaker PMIs after Prime Minister Scott Morrison said they are headed for a COVID-safe economy. They will be easing restrictions on key health and education services next week, such as elective surgeries and dental procedures, and allow children to start returning to school May 11. The fact that these countries are ready to restart activity after effectively controlling COVID-19 (and not before) means that they are leaps and bounds ahead of the U.S. in terms of economic recovery, which should be wildly positive for their currencies.
The recovery in oil is helping the Canadian dollar, but unlike Australia and New Zealand, the outlook for Canada is grim as the economy suffers from the triple blow of COVID-19, U.S. shutdown and historically low oil prices. Despite broad based declines in manufacturing and service sector PMIs, sterling was flat. The resilience of the currency is tied to U.S. dollar and euro flows.